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Foreign Aid as Prize: Incentives for a Pro-Poor Policy

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  • Sayanak, Tejashree
  • Lahiri, Sajal

Abstract

We develop a theoretical model of foreign aid to analyse a method of disbursement of aid which induces the recipient government to follow a more pro-poor policy than it otherwise would do. In our two-period model, aid is given in the second period and the volume of it depends on the level of wellbeing of the target group in the first period. We find that this way of designing aid does increase the welfare of the poor. We also consider the situations where the donor and the recipient governments act simultaneously as well as sequentially, and find that by moving first in a sequential game, the donor country can, under certain conditions, increase the welfare of the poor and its own compared to the case of simultaneous moves.

Suggested Citation

  • Sayanak, Tejashree & Lahiri, Sajal, 2008. "Foreign Aid as Prize: Incentives for a Pro-Poor Policy," WIDER Working Paper Series 063, World Institute for Development Economic Research (UNU-WIDER).
  • Handle: RePEc:unu:wpaper:rp2008-63
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    References listed on IDEAS

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    Cited by:

    1. Malokele Nanivazo & Sajal Lahiri, 2015. "Promoting Trade Liberalization: Theoretical Analysis of Foreign Aid as Prize," Review of Development Economics, Wiley Blackwell, vol. 19(3), pages 748-757, August.

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    Keywords

    foreign aid; fungibility; governance; welfare; prize;

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